Fixing the deficit means a recession

Updated 8:08 pm, Friday, July 27, 2012

As the matter of the $109 billion in reduced federal spending for 2013 that goes into effect automatically on Jan. 2 is discussed, it becomes increasingly apparent that any serious attempt to reduce the annual federal budget deficit is going to come at a painful price — namely an economic recession.

The cuts, which would happen yearly for a decade, would flow from the Budget Control Act of 2011, which Congress passed after last year's acrimonious debt-ceiling fight.

A George Mason University report last week projected that a $109 billion cut in across-the-board spending next year would wipe out two-thirds of U.S. economic growth by itself and that the ripple effect could turn the economy negative.

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Federal Reserve Chairman Ben Bernanke on the same day delivered the same message to Congress. Federal spending cuts “would probably knock the recovery back into a recession and cost a lot of jobs,” Bernanke said.

George Mason University Professor Stephen Fuller used a phrase that helps explain the fallout of a large federal spending cut. “The (economic) friction of less government,” he said.

What does that mean?

San Diego, Calif., Mayor Jerry Sanders, presenting the George Mason report, gave an example. San Diego could lose tourism jobs because Customs and Border Protection staffing cuts would not be able to process the same number of cruise ships that originate and terminate trips there.

Anyone visualizing that can see what lower CBP staffing would do at U.S.-Mexico ports of entry: longer lines for Mexicans trying to come to San Antonio to shop and difficulties moving commercial cargo across the border.

How about gutting the small budgets of the Securities and Exchange Commission and the new Consumer Financial Protection Bureau? Those agencies are needed to stop another financial industry crisis that last time led to a loss at one point of $19 trillion in U.S. household wealth. That amount is more than the accumulated federal debt.

There are more examples, like Pentagon budget cuts and their effect on contracting for private companies and their workers, and the list goes on and on. It adds up to a lot of “friction.”

Don't think a $109 billion cut in 2013 will dent the federal budget deficit much. The projected 2011-12 federal deficit is projected at more than $1.1 trillion with total expenditures of nearly $3.8 trillion.

In that context, $109 billion does not seem like much of a cut. But when interest payments on the accumulated national debt and entitlements are subtracted from the budget, not much is left in the coffers, and the budget cut suddenly looks larger.

If Congress wants to avoid a recession next year, it can sidestep the federal budget cuts. Congress created the Budget Control Act. It can rescind it. Congress can cut the budget less and raise taxes to reach the same $109 billion goal, but a recession may be just as likely. Higher taxes mean less consumption and investment.

Should Congress want to kill the Budget Control Act, it must agree on a way to do it. Can Congress do even that?